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07. 20. 2018

New entrants eye digital payments – should banks worry?

Microsoft’s Outlook and Facebook’s Instagram will be joining the ranks of other tech, social media and retail heavyweights by launching in-app digital payments. What’s in it for them and how will the new entrants affect incumbent banks?

Banks and other traditional payments providers will soon see two new big-name disruptors emerge in the ever-expanding digital payments market. Microsoft’s email application Outlook and Facebook’s photo and video-sharing app Instagram have both announced testing new payment features that are integrated into their existing service.

Outlook and Instagram might seem unlikely entrants into financial services and their decision to dip their toe into payments come as somewhat of a surprise to many traditional players. But venturing into payments actually makes perfect sense for the two giants as they want to increase customer loyalty and attract new users – not to mention tapping possible new revenue sources by adding extra features.

Frictionless digital experiences have never been more important to customers, and cutting the number of clicks to speed up bill payments or purchases result in a more seamless and convenient service. This is the reason why many other retailers, merchants, big tech firms and social media giants have already introduced in-app payments, even if their focus is outside the financial services sector.

How it works

Microsoft announced in May that its new service will enable users to pay bills and invoices directly from their inbox, without needing to leave Outlook and open another app during the process. Companies emailing bills or invoice notifications to customers will have to embed a payment action within Outlook. The new service is powered by Microsoft Pay, a payment framework originally launched in 2016 under the name Microsoft Wallet, and is planned to be rolled out in phases.

However, Microsoft will not act as a bill pay agent itself. The transactions will be managed by third-party payment processors, such as Stripe and Braintree, billing services like Zuora and invoicing services, such as FreshBooks, Intuit, Invoice2Go, Sage, Wave and Xero. Companies will need one of them to be able to embed a payment action into their invoices. Microsoft will send billing data to its partner merchants, which will then charge customers directly.

Not having to open another website or app and enter payment information whenever customers want to pay for something was also the key reason for Instagram to develop its new in-app service, according to TechChrunch, which first reported the firm’s ‘quietly launched’ payment feature in May. Instagram then confirmed that native payments for booking appointments at restaurants or salons was already live for a limited set of partners.

Instagram allows users to register a debit or credit card as part of their profile, set up a security PIN and begin purchasing products or services without ever leaving the app. One of the first partners for the feature is dinner reservation app Resy, but Instagram is also planning to allow direct payments for other services, like buying movie tickets, in the future. Instagram payments are backed by Facebook’s payments rules, TechChrunch added.

What’s in it for the new entrants?

The business models and expected revenue streams for the new payment functions could well be different for Outlook and Instagram. Offering the convenience to pay for bills and invoices within the app can help increase customer loyalty for Outlook and ‘lock users in the Microsoft ecosystem’, TechChrunch explained. This is what Android Pay and Apple Pay already do for competing platforms.

Engadget went on to say that Microsoft may not even make money on bill payments directly. However, the new service could prevent users from switching to another email app and attract several third parties to join, should the uptake of Outlook payments pick up.

The story is quite different for Instagram. Introducing in-app payments can help it grow more into commerce and online shopping. It’s yet unclear if the service will be paid for by the merchants, but it can still be financially viable as companies advertise more and more on the platform, Roger Niederer, head of merchant services at SIX Payment Services, pointed out recently. The opportunity to shop directly on Instagram is particularly interesting considering the large network of consumer influencers present on the platform. Shopping can become even more intuitive thanks to the new payment function.

If advertisers get higher conversion rates because users don’t quit in the middle of checkout to fill in their payment information, brands might prefer to push people to buy via Instagram, according to TechChrunch. Even if Instagram takes no share of future revenue, brands are likely to increase ad spend to get their shoppable posts seen by more people.

Possible effects on incumbent banks

Tech giants Apple and Google, fintechs including TransferWise, social media giants like Facebook and merchants such as Amazon or Starbucks have all created their own digital payment offerings. And there are yet more to hop on the bandwagon. Messaging app Snapchat, for example, is also testing in-app payment strategies, while car sharing giant Uber has applied for an e-money licence to broaden its range of consumer-facing services.

This shouldn’t come as a surprise really, as the size of the digital payments market is likely to reach a staggering $5 trillion worldwide by 2020, according to BCG. This growth creates a huge opportunity for non-bank players and traditional financial institutions alike. BCG warns that banks failing to keep pace with market leaders in digital payments will lose market share, as any cut in payment interactions have a ripple effect on other business areas and could result in lower revenues elsewhere.

But others don’t believe the future is so gloomy. There’s no doubt that non-bank firms put pressure on incumbents to innovate and transform their business models to meet customer expectations of speed, flexibility and convenience, but it is unlikely that any one of these companies will entirely replace banks in the short term, Jill Warner, global business director at Technology Practice Group, said. Retailers will present a wider range of payment options to their customers, but traditional payment methods will continue to exist within the overall payment landscape, Roger Niederer at SIX Payment Services added.